Pensions dilemma

I recommend to everyone, especially those in their 20s and 30s, to have a close look at the White Paper published by the government proposing significant changes to our pensions system.

After reading the document, one will realise that David Spiteri Gingell, who led the pensions working group, was right in his assessment that unless the country tackles the welfare reform without further delay, the issue will sooner rather than later turn into a national crisis.

Even though I do not agree with some of the measures it proposes, the Spiteri Gingell report is a significant step forward as finally we have a public document that outlines the challenges we must face without further delay and that makes strong concrete proposals which should serve as a launching pad for a serious national debate leading to decisions.

It was indeed ironic that over the past years the government expected the nation to tackle the pensions issue seriously when various reports it had commissioned never saw the light and remained close to the government's chest. So the publication of such a comprehensive document is undoubtedly an important step forward.

The implications of the proposed changes on the younger generation are serious and it would be shameful if the general public were to miss this opportunity to examine the proposals being put forward for consideration.

On reading the document, I found myself in agreement with most of its conclusions on the present state of affairs, among them the emphasis on the need to act now.

The report contains a large number of valid proposals, including the gradual raising of the retirement age to 65, the annual adjustment of the minimum pension guarantee to safeguard its value against inflation erosion and the proposal that part of the social security contributions be allocated to fund health services. Most significantly, the report states that the proposed measures would not affect current pensioners or those close to reaching retirement age.

However, I have several reservations on some of its major proposals. First of all, I believe that if the government will make participation in private pension schemes compulsory, it should also give the individual the right to opt out of the current Pay As You Go pension system.

The proposal to oblige an individual to take up an additional private pension is in itself an admission that what an individual is paying now to the state will not translate into a state pension in the future. In other words, the government is indirectly making the following admission: "You must continue to pay a social security contribution until you reach retirement age because the state needs your money to pay the present pensions bill. However, you will also have to take up a mandatory pension scheme because at the end of the day, when you reach retirement age, you are not going to receive a sufficient return on your money invested in the two-thirds pension system."

I acknowledge the need for a mandatory private pension, especially in the case of a generation that it is indeed spending more and saving less. However, the individual should not be forced to continue pumping his or her money into a future state pension, when the government itself is aware that such pensions will not be sufficient to guarantee an adequate standard of living.

Another controversial issue raised in the White Paper is the proposed increase in the social security contribution period from 30 years to 40. I have my doubts about the effect of increasing the contribution period by one-third.

Social patterns are changing radically and more and more individuals are opting for tertiary education, postgraduate qualifications, training or maybe an experience abroad or a career break.

The proposed measure would mean that an individual would have to start paying his or her contribution by the age of 25 without interruption until he or she reaches the age of 65. So what will happen to a person who decides to pursue his or her studies further and who will therefore enter the labour market at 28 or 29?

What will happen in the case of a mother who decides to break her career for some five years to take care of her children? What will happen in the case of an individual who is unemployed for some time between jobs? Are we expecting such people to pay sufficient contributions to make up for the missing years and, in return, receive what we now know would be an insufficient state pension?

Moreover, for people to be able to form an opinion on whether they are in favour or against the proposed mandatory second pillar pension, the government needs to pronounce itself on the rate it intends to impose: there is a difference between paying the equivalent of two per cent of one's gross annual salary and five or six per cent of the individual's gross revenue.

Another proposed measure which requires further reflection is the change in the calculation of the first pillar pension. At present, this is calculated on the average of an individual's best three years in the last 10 years of employment.

The proposal is for a change of methodology, namely that the government would take an average of the salary spread over 40 years to calculate the two-thirds pension. How would this affect the pension of an individual reaching retirement age today if his or her pension had to be calculated on what he or she used to earn in 1964 or in 1974 or during the difficult early Eighties?

All in all, the Spiteri Gingell report is a valid constructive document which should be the launching pad of a serious national debate on this important issue. One hopes that we are mature enough to handle such a sensitive issue.